Which of the following is not a policy option if a country finds itself in a liquidity trap situation?
A) Expansionary fiscal policy via increased government purchases.
B) Expansionary monetary policy designed to decrease interest rates and increase investment spending.
C) Expansionary fiscal policy via decreased taxes.
D) Expansionary monetary policy designed to increase inflation expectations.

Question

Quizplus · Accepted Answer

In a liquidity trap, traditional monetary policy tools become ineffective at stimulating the economy because interest rates are already near zero, and therefore cannot be lowered further to encourage investment spending. Expansionary fiscal policies (A and C) and policies aimed at increasing inflation expectations (D) remain viable options.

Which of the Following Is Not a Policy Option If